Kelsey Breathitt

Travis Zulfer
Grygorii Tykhonovskyi
Luo
Robert Ratliff
Jones Electrical Distribution
1.) Jones Electrical Distribution sells electrical components and tools
to general contractors and electricians. The products that we sell
include controllers, breakers, signal devices and fuses and they are
purchased from nearly 100 different suppliers. Jones customers use
the products in the construction and repair of commercial and
residential buildings. The companys sales depend in many ways on
the seasonality of its customers businesses which have their highest
activity during the spring and summer when weather is most suitable
for construction work. The market in which Jones competes is large
and highly competitive; we have to face significant competition from
national distributors. To be able to compete, we have built up sales
volume by successfully competing on the price and using an
aggressive direct sales force. In turn, to be able to compete on the
price, we have to maintain tight control over operating expenses,
including paying our sales force primarily on commission and keeping
overhead to a minimum. In addition, as part of the companys expense
management effort, we have historically paid suppliers within 10 days
of the invoice date in order to take full advantage of the 2% discounts
the suppliers have offered for quick payments.
2.) According to the Balance sheet (see exhibit 1 for details), there is
about a 5% decrease in cash balance from the years 2005-2006, which
tells us that we would probably have difficulty paying off our suppliers
on time. As a result, we would not be able to use the 2% discount
provided by our manufacturers. For example, in the first quarter of
2007, we owe $203,000 to our suppliers. If we do not use our discount,
we would not be able to save $1,353 =($203,000*2%) per month or
$16,240 per year, which is not a good thing. We also can see that
there is an increase in inventory from year to year, which tells us that
we are spending more on inventory to maintain an increase in sales
which, eventually, might lead to an increase in cash balance. From
2005-2007, we can see that there is an increase in accounts payable
and a decrease in long-term debt. This is because we got some of our
purchases on credit, and since there is an increase in sales, we have
to respond rapidly to demand if we want to keep our customers, and
that is again why we have to have more sources to buy more
inventories. In general, our total liabilities went up and that is why we
need more cash to be able to handle demand for our products and to
pay off short term debt on time to our suppliers.
According to the Income Statement (see exhibit 2 for more details), our
sales are expected to be $2.7 million at the end of 2007, which is about
17% increase from sales in 2006 but increase in sales does not
necessarily mean that there will be an increase in income. Since, our
short-term debt level went up even more in 2007, we will have to pay it
off as soon as possible. Looking at our quick ratio (see exhibit 3 for
more details on financial ratios), which tells us about our overall
liquidity minus inventory, the liquidity is steadily going down from 2004
to 2007. Shortage in cash, might lead to having difficulty with paying off
the debt on time obviously not a good thing. Inventory turnover for
Jones Electrical in 2004 and 2005 was on the same level at about 6.70
but in 2006 it went down to 5.92. There might be many reasons why
this happened; for example, a low turnover rate can indicate poor
liquidity or possible overstocking, but it may also reflect a planned
inventory buildup in the case of material shortages or in anticipation of
rapidly rising prices. A good thing about Jones Electrical is that the
company manages to collect its accounts receivables pretty much on
time. An average collection period is 40 days. We are also getting
better at managing fixed assets. Our fixed assets turnover has been
increasing for the past three years. Overall, we have potential in
growing. If the sales are going to be growing the way they do right now,
we will have a promising future.
3.) With the extra cash provided from the bank loan, we will not only
become capable of taking advantage of the 2% discount offered for
quick payments, but will also be able to buy more inventories, allowing
it to grow and further increase sales. In addition, looking at the
statement of cash flows for Jones Electrical for 2005 and 2006 (see the
last page to see the statement of cash flows), we can see that from
2005 to 2006 there was a huge jump in investment in inventories, due
to forecasted increase in sales for 2007.
4.) There might be many reasons why we have had an increase in
accounts receivables. One of them is that our customers, who are
connected to construction field for the most part, depend on the
seasonality of the construction business. Some customers take
products on credit and are able to pay back only after they receive
enough revenue. Increase in inventory balance can be explained by
the boost in sales. Increase in demand requires increase in inventory.
5.) We definitely should use the trade discounts with our suppliers. For
example, in the first quarter of 2007, we owe $203,000 to our suppliers.
If we do not use our discount, we would not be able to save $1,353 =
(($203,000*2%)/3) per month or $16,240 per year, assuming that sales
are going to be constant for the next three quarters. By using discounts
from manufacturers, we will be able to save not only a lot of money but
also have a good reputation among suppliers, which in the future,
could help obtain even higher discounts.
6.) We have estimated that we will need $350,000 for 2007, in order
to maintain increase in sales. Looking at the first quarter of 2007,
Jones has $32,000 in cash and $290,000 in accounts receivables (see
exhibit 2 for details). It is about $322,000 of cash total on hand,
assuming that our customers will pay on time. We have to pay
accounts payable in the amount of $203,000 and long term debt that is
due this year in the amount of $24,000, so total debt amount that we
owe is $227,000. If subtract debt from cash ($332,000-$227,000) we
get $105, 000 cash on hand. These numbers are only for the first
quarter. We are planning on buying more inventories. In addition, there
are extra expenses such as mortgage payable for the house and life
insurance. Also Jones owes $2,000 plus 8% interest per year to
Verden, Jones ex-partner. In total, we owe $25,920 =($2,000*12
month*1.08 interest) to Verden in 2007. That is why we need additional
$350,000 in order to cover all the expenses. Besides, extra cash on
hand will help to resolve many problems if we will have increase in
sales in 2008.
7.) We assumed that if we get the line of credit in the amount of
$350,000, we will pay the same payments as we did with the line of
credit payable of $250,000, therefore the amount of payment a month
for the line of credit is $20,833.33= ($250,000/12 month). We will
continue to pay this monthly amount until the line of credit will be paid
off, which will be in 16 years (using financial calculator PV=-350,000,
PMT=20,833.33, I/Y=7.5%+1.5%=9/12 month=0.75, FV=0, calculate
for N=15.88 or about 16 years).
8) and 9). To reduce the size of the line of credit we need probably to
learn how to manage our expenses better. As was mentioned before, if
possible it is in our best interest to use trade discounts. Maybe, we also
should learn how to manage our inventory in more efficient way so
there is no overhead when we dont need it or shortage when we need
it the most. If there is extra cash on hand, we probably should invest
somewhere so it will earn additional income. If we get this new line of
credit, we will have more responsibilities. We will have to count every
penny and live a much more modest lifestyle. Since we are expanding
our business, we will have to work even harder if we want our business
to grow successfully.